Top business story: Wall Street's makeover

With the speed of a supermarket thriller, Wall Street was upended and remade in 2008.

ELLEN SIMON

With the speed of a supermarket thriller, Wall Street was upended and remade in 2008.

First, investment bank Bear Stearns teetered near collapse, then was sold in a shotgun deal to JPMorgan Chase & Co. in a deal that valued each of Bear's shares at $10 — roughly the same price as a New York movie ticket. The shares had traded at $154 the year before.

Then Lehman Brothers filed for bankruptcy in September. The failure of the firm, which had roots going back to the Civil War, shook investors around the globe.

They've yet to recover.

After Lehman's filing, New York traders started their work days at 3 a.m., when European markets opened. Financial chiefs were summoned to compulsory weekend meetings at the New York Fed, where they ordered takeout and dickered over the fate of the nation's largest banks. Rumors spread. No investment bank could be trusted as sound, no stock could be assumed safe.

In a year heavy with financial news, Wall Street's woes were voted the top business story by U.S. newspaper and broadcast editors surveyed by The Associated Press. The continued real estate troubles were a close second, followed by the $700 billion bailout and the global recession.

The decline in U.S. home prices and the increase in foreclosures devalued the mortgage securities that had been essential to Wall Street's money machine. Before housing crashed, the banks sold the securities and reaped fees. After housing crashed, banks held the securities and watched their values plummet.

Debt markets, also essential to Wall Street, froze. Lehman's bankruptcy brought daily rumors that another bank was tottering — many of which proved true.

Washington Mutual Inc., with $307 billion in assets, collapsed in September, the largest bank failure in U.S. history. Merrill Lynch sought shelter after its stock plunged, agreeing to be taken over by Bank of America Corp. Wachovia Corp. agreed to be bought by Wells Fargo & Co. Investment banks Goldman Sachs Group Inc. and Morgan Stanley transformed themselves into commercial banks overnight.

The U.S. government loaned $150 billion to insurer American International Group Inc. It also took over mortgage giants Fannie Mae and Freddie Mac. In late November, the government propped up Citigroup Inc., agreeing to shoulder hundreds of billions in possible losses and plowing $20 billion into the company.

By almost any measure, the housing market got worse in 2008, its third year of decline. Home prices continued to fall. Foreclosures hit new highs. Housing starts hit an all-time low in November, as home builders who couldn't compete with foreclosure sales virtually stopped building.

"We have seen no improvement over the past month in terms of sales conditions for new homes," David Crowe, chief economist of The National Association of Home Builders, said in December. "In fact, certain factors have gotten progressively worse, not the least of which is the job market."

Treasury Secretary Henry Paulson first asked Congress to pass a two-page proposal authorizing the financial industry bailout. That plan went down in flames. His next try, which passed after much bipartisan arm-twisting, was more detailed. But the terms kept changing. Paulson first said the Treasury would buy troubled assets from financial institutions, then, he said it wouldn't. Instead, the Treasury used most of the first round of bailout money to invest directly in banks and lenders.

Within two months, Treasury had allocated the first $350 billion to banks, insurers and automakers. In late December, Paulson asked Congress for the second half.

As credit markets remained weak, some lawmakers said they'd been misled, while others argued some of the money should be used to avoid foreclosures.

"We've been lied to," said Rep. Davis Scott, D-Ga. said in December. "We've been bamboozled."

It seemed no nation was immune to the economic woes, as even Mongolia saw runs on its banks. Argentina nationalized pension funds. Icelanders saw their three main banks and their currency collapse. Japan and much of Europe fell into recession. China's exports plunged in November by the largest amount in seven years. As oil traded below $40 a barrel, exporters Russia, Venezuela and Iran suffered.

Oil's meteoric rise to $147 a barrel in July changed America's habits. Mass transit ridership saw its largest quarterly increase in 25 years. Highway driving fell by almost 5 percent. Traffic deaths fell. Truckers went bankrupt.

Then, the global financial crisis sent oil prices plummeting; they fell by more than half from the beginning of October to the end of November, raising questions about whether Americans' habits would reverse as quickly as they'd been established.

As nervousness spread in September and credit markets froze, stocks plunged everywhere from Hong Kong to Mexico. Russian authorities closed Moscow's stock market for days at a time to contain the panic. The broadest measure of U.S. stocks, the Wilshire 5000, is down more than $7 trillion for the year. Diversification stopped working — no market was spared, no asset class went untouched.

By November, U.S. automakers' sales had dropped about 16 percent for the year. General Motors Corp. and Chrysler LLC pleaded for loans from Washington, while Ford Motor Co. said it didn't need a government line of credit, but it would nonetheless take one. The Senate quashed a bailout passed by the House, but the Bush administration, saying it would be irresponsible to let the industry die, offered it $17.4 billion in rescue loans.

As prices for corn, fuel and grains soared through the summer, American shoppers grappled with substantial food inflation for the first time in 17 years. The U.S. Department of Agriculture forecast food prices would rise 5 to 6 percent for the year, compared with an average 2.5 percent annual rise for the prior 15 years. The rate of increase slowed in October and November, but food prices didn't fall the way gas prices did.

How Bernard Madoff earned steady returns of 7 percent to 9 percent a year in good markets and bad was a Wall Street mystery for almost 20 years. In December, Madoff said the returns were fiction and his investment company was a scam, according to federal investigators. As much as $50 billion may have evaporated in the scheme, which could be the largest Ponzi scam in history.

After Lehman filed for bankruptcy, the money market Reserve Primary Fund, which had invested heavily in Lehman debt, "broke the buck," with its assets falling to 97 cents for every dollar invested. It was the first time this happened in the money market industry in 14 years. Investors across the country — who had seen money market funds as being safe as cash — fled for the exits. Reserve alone saw $40 billion in redemption orders on Monday and Tuesday the week Lehman filed. As the year ended, Reserve was still liquidating its funds.

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